Trade Group Wants U.S. Involved in Fannie, Freddie

By

Nick Timiraos

July 21, 2010 5:45 p.m. ET

An influential Wall Street trade group became the latest organization to call on the federal government to continue playing a major role in the mortgage market as Washington decides what to do with home-loan giants Fannie Mae and Freddie Mac.

The Securities Industry and Financial Markets Association, Wall Street's main lobbying group, said in a proposal submitted to the Obama administration on Wednesday that the government couldn't completely exit the mortgage market without sending costs sharply higher for consumers.

"The urge to 'slay the dragon' should not cause collateral damage that would eliminate or make impossible the beneficial impacts" conferred by government support of the U.S. mortgage markets that dates to the Great Depression, the trade group said in its proposal.

The group argued against a fully private market by pointing to the struggles of private mono-line bond and mortgage insurance companies during the recent crisis. "Clearly private sector solutions were not, and likely will not be, resilient in times of stress," the group said.

The recommendations were outlined in a letter submitted to the Obama administration as part a "public comment" period that ended on Wednesday and which drew hundreds of responses from an array of mortgage-market participants.

The administration has said it won't put forward a detailed proposal on Fannie and Freddie until early next year, though Rep. Barney Frank (D., Mass.) said he would begin drafting legislation this fall.

Sifma's proposal joins an emerging consensus of academics, industry groups, and consumer advocates in calling for creating new companies or using Fannie and Freddie to provide explicit government guarantees of securities backed by mortgages that meet certain standards. Big divides remain on other issues, including how to support affordable housing and whether any successors should have a portfolio to buy up mortgages during times of market stress.

The U.S. took over Fannie Mae and Freddie Mac through a legal process called conservatorship two years ago as mounting losses threatened to wipe out thin capital reserves. So far, the Treasury has injected $145 billion into the companies to keep the afloat, and it has promised unlimited additional amounts. Government-related entities are responsible for backing more than nine in 10 new loans today.

Some conservative academics and congressional Republicans have warned against returning to any mortgage market that relies on government subsidies or guarantees. A fully private market might lead to higher costs, they say, but it would also prevent taxpayers from shouldering massive risks.

But Richard Dorfman, the head of securitization for Sifma, said it was "very unrealistic to assume that we could go from what has evolved—a highly robust, vibrant and liquid market—to virtually no market for non-guaranteed product," he said. Over time, as investors become more confident in housing and mortgages, the government might be able to reduce its backstop, he said.

Sifma didn't outline a preferred ownership model. Mr. Dorfman, the former president of the Federal Home Loan Bank of Atlanta, said that either a public utility or a lender-owned cooperative could resolve some of the problems that doomed the previous public-private hybrid ownership model.

Most proposals so far haven't addressed one of the biggest challenges facing Congress: how to raise capital for any successors to Fannie and Freddie. One idea, from investment bank Keefe Bruyette & Woods Inc., calls for splitting Fannie and Freddie into a "good bank" and "bad bank" where the government would keep the companies' toxic legacy assets and spin off any profitable pieces.

Under the plan, banks and other originators that sell loans to Fannie and Freddie would ultimately take ownership of the good bank. To recapitalize the entities, mortgage originators would be required to hold a 5% stake of any loan sold to the companies as an equity investment.

"The degree to which government is involved today, we've got to turn that around. That isn't something that is conceivably healthy for the market," said Frederick Cannon, KBW's co-director of research.

Another thorny issue: how to replace the support for low-income and underserved markets provided by Fannie and Freddie. Many industry groups have called for Congress to fund those efforts through existing government agencies.

A separate proposal from a working group convened by the Center for American Progress, a liberal think tank with close administration ties, says private-market participants that benefit from government guarantees should have a continued role supporting under-served borrowers and distressed communities.

The group proposes creating a "housing finance innovation fund" that would allow for private-public risk-sharing projects to develop and fund mortgages to serve those communities.

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